THREE ECONOMIC ISSUES

The econometric analysis of happiness data allows us to go beyond the a priori notions of theoretical economics, based on the distinction between anticipated and unanticipated inflation. Adjustment is the more costly, the higher is the variability in aggregate inflation and in relative prices caused by an increase in inflation. People must invest a lot of effort to inform themselves about, and insulate themselves from, the expected price increases. They may make many different errors, for instance underestimating the extent of future inflation, or how a particular price changes in comparison with other prices.

The welfare costs of rising prices have previously been measured by computing the appropriate area under the money demand curve. Based on this method, the cost of 10% annual inflation has been calculated to be between 0.3% and 0.45% of national income (Fischer, 1981; Lucas, 1981). This is very little and suggests that an anti-inflationary policy is rarely worth the cost it entails in terms of additional unemployment and real income loss. In contrast, happiness research finds that inflation systematically and sizeably lowers reported individual well-being.

Effects of democracy

The consequences of democratic rules have mainly been analysed in economics with regard to their effects on economic growth. Data on subjective well-being allow us to look at the interaction between democracy and happiness. The extent to which a constitution is democratic and allows its citizens to make decisions according to their own preferences can be captured by various measures. It is found that increased possibilities to directly participate in public decision-making via popular referenda and a decentralised state significantly contribute to happiness.

The insights gained about happiness are in many respects useful for economic policy undertaken by governments. Two examples suffice to illustrate the point:

• Welfare policy is faced with the question of to what extent people with low incomes can be helped by financial support. If low income is due to unemployment, the research results suggest that not much is achieved by providing the person with a higher income. Rather, the policy should be directed towards providing the person with appropriate job opportunities.

• Tax policy must consider to what extent various income groups are affected. Is it possible to achieve social goals by redistributing income, or are the negative effects on subjective well-being prohibitive?

The discussion in this paper intends to show that the happiness research in which economists have recently become engaged constitutes an important advance over previous economics. This research is only in its initial stages, and much still awaits analysis. For instance, most happiness studies consider developed economies. Additional empirical studies devoted to developing economies could broaden the picture and qualify previous findings. It has sometimes been claimed that comparisons of happiness between countries make little sense because of cultural differences. While differences between cultures are important, they are often exaggerated. Culture may, to some extent, affect what factors influence happiness but, as shown in various studies, there are universal factors determining subjective well-being, and it may also be argued—as Ng (2001b) does—that happiness as an ultimate goal in life is independent of culture.

THREE ECONOMIC ISSUES

Three economic issues

Economics is the study of how people choose to allocate scarce resources to satisfy their unlimited wants. The main problem in economics is the question of allocating scarce resources between competing uses. In this section three economic issues are discussed to show how society allocates its scarce resources between competing uses. In this connection the question what, how and for whom to produce is of great significance.

The oil price shocks

Oil is an important commodity in modern economies. Oil and its derivatives provide fuel for heating, transport, and machinery, and are basic inputs for the manufacture of industrial petrochemicals and many household products ranging from plastic utensils to polyester clothing. From the beginning of this century until 1973 the use of oil increased steadily. Overmuch of this period the price of oil fell in comparison with the prices of other products. Economic activity was organized on the assumption of cheap and abundant oil.

In 1973 - 74 there was an abrupt change. The main oil-producing nations, mostly located in the Middle East but including also Venezuela and Nigeria, belong to OPEC - the Organization of Petroleum Exporting Countries. Recognizing that together they produced most of the world's oil, OPEC decided in 1973 to raise the price at which this oil was sold. Although higher prices encourage consumers of oil to try to economize on its use, OPEC countries correctly forecast that cutbacks in the quantity demanded would be small since most other nations were very dependent on oil and had few commodities available as potential substitutes for oil. Thus OPEC countries correctly anticipated that a substantial price increase would lead to only a small reduction in sales. It would be very profitable for OPEC members.

Oil prices are traditionally quoted in US dollars per barrel. Fig. 1 shows the price of oil from 1970 to 1986. Between 1973 and 1974 the price of oil tripled, from $2,90 to $9 per barrel. After a more gradual rise between 1974 and 1978 there was another sharp increase between 1978 and 1980, from $12 to $30 per barrel. The dramatic price increases of 1973 - 79 and 1980 - 82 have become known as the OPEC oil price shocks, not only because they took the rest of the world by surprise but also because of the upheaval they inflicted on the world economy, which had previously been organized on the assumption of cheap oil prices.

People usually respond to prices in this or that way. When the price of some commodity increases, consumers will try to use less of it but producers will want to sell more of it. These responses, guided by prices, are part of the process by which most Western societies determine what, how and for whom to produce.

Consider first how the economy produces goods and services.

When, as in the 1970s, the price of oil increases six-fold, every firm will try to reduce its use of oil-based products. Chemical firms will develop artificial substitutes for petroleum inputs to their production processes; airlines will look for more fuel-efficient aircraft; electricity will be produced from more coal-fired generators. In general, higher oil prices make the economy produce in a way that uses less oil.

Oil price ($ per barrel)

Figure 1. The price of oil. 1970 - 86

How does the oil price increase affect what is being produced?

Firms and households reduce their use of oil-intensive products, which are now more expensive. Households switch to gas-fired central heating and buy smaller cars. Commuters form car-pools or move closer to the city. High prices not only choke off the demand for oil-related commodities; they also encourage consumers to purchase substitute commodities. Higher demand for these commodities bids up their price and encourages their production. Designers produce smaller cars, architects contemplate solar energy, and research laboratories develop alternatives to petroleum in chemical production. Throughout the economy, what is being produced reflects a shift away from expensive oil-using products towards less oil-intensive substitutes.

The for whom question in this example has a clear answer.

OPEC revenues from oil sales increased from $35 billion in 1973 to nearly $300 billion in 1980. Much of this increased revenue was spent on goods produced in the industrialized Western nations. In contrast, oil-importing nations had to give up more of their own production in exchange for the oil imports that they required. In terms of goods as a whole, the rise in oil prices raised the buying power of OPEC and reduced the buying power of oil-importing countries such as Germany and Japan.

The world economy was producing more for OPEC and less for Germany and Japan. Although it is the most important single answer to the 'for whom' question, the economy is an intricate, interconnected system and a disturbance anywhere ripples throughout the entire economy.

In answering the 'what' and "how¹ questions, we have seen that some activities expanded and others contracted following the oil price shocks. Expanding industries may have to pay higher wages to attract the extra labour that they require. For example, in the British economy coal miners were able to use the renewed demand for coal to secure large wage increases. The opposite effects may have been expected if the 1986 oil price slump had persisted.

The OPEC oil price shocks example illustrates how society allocates scarce resources between competing uses.

A scarce resource is one for which the demand at a zero price would exceed the available supply. We can think of oil as having become more scarce in economic terms when its price rose.

VOCABULARY NOTES

Assignments

I. Suggest the Russian equivalents

to increase steadily; try to economize on the use of...; to choke off the demand; to encourage consumers to purchase smth; to encourage the production of...

II. Replace the parts in italics by synonyms

three economic questions; to give a share of resources; to have scarce supplies of raw materials; a sudden change; realising that; potential replacements; to encourage people who use oil; price increases six times; try to cut down on the use of oil

III. Find in the text antonyms for the following words

rare, scarce; outputs; expensive; exports; straightforward; get, acquire; not to need; getting smaller

IV. Fill in the gaps with the words and expressions from the text

1. Economics is the study of how people choose scarce resources to satisfy their

2. Economic activity was organized on the assumption of____________ oil.

3. In 1973 - 74 there was an change in oil prices.

4,_______ countries correctly forecast that __________ in the quantity demanded would be small.

5. Most nations are very dependent on oil and have few commodities available as for oil.

6. Oil prices are traditionally_________ in US dollars per barrel.

7. The price of oil_________ , from $2.90 to $9 per barrel.

8. There was another_______ between 1978 and 1980, from $12 to $30 per barrel.

9. The dramatic price increases inflicted________ on the world economy.

10. These responses, _______ prices, are part of the process by which most Western societies what,

_______ how and for whom to produce.

11.Chemical firms will develop __________ for petroleum inputs to their production processes; airlines will look for more______________________ aircraft.

12. Firms and________ reduce their use of products.

13. Commuters form_________ or move closer to the city.

14. High prices not only______ for oil-related commodities; they also encourage consumers to purchase .

15.OPEC________ from oil sales increased from $35 billion in 1973 to nearly $300 billion in 1980.

16. The rise in oil prices raised_________ of OPEC.

17.The economy is an__________ , interconnected system and a anywhere ripples throughout the entire economy.

18.______ industries may have to pay higher wages to attract the________ labour that they require.

19. A scarce resource is one for which the demand at a zero price would the available supply.

V. Find in the text English equivalents for the following

распределять ресурсы; ограниченные ресурсы; значительное повышение цен повлечет за собой несущественное снижение объема продаж; цена возросла в три раза; резкий подъем; резкий взлет цен; возросшие доходы; повысить/понизить покупательную способность; повышать заработную плату для привлечения дополнительной рабочей силы

VI. Explain in English

prices are quoted; a gradual rise; a sharp increase; household; commuters; commodities

VII. Check your grammar

Present Tenses

Use the following verbs to complete the paragraph below: concern, base, discuss, be, show, take up, hope for, say, offer, wish, live, suggest, provide, govern

Students_______ economics for different reasons. Some _______ a career in business, some for a deeper understanding of government policy, and some ______________ about the poor or the unemployed.

This book _______ an introduction, which ___ that economics a live subject.

It real insights into the world in which we . The material that we in this book by two ideas. The first ___________ that there a body of economics, which has to be learned in any introductory course. The second on the belief that modem economics is more readily applicable to the real world than traditional approaches .

Past Tenses

Write the following sentences out in full, likе this:

Keynes/famous/his/day/economist/own/a/in... (be)

Keynes was a famous economist in his own day

* 1915/ Treasury/ London/ in/ he/ in/ the/... (join)

* best-known/ 1935/ his/ book/ in...(publish)

* public/ war/ during/ he/ service/ the/ to... (recall)

* 5th/ in/ Cambridge/ June/ Keynes/ 1883/ on... (bear)

* student/ he/ distinguished/ a... (be)

* instrumental/ the IMF/ in/ the/ 1944/ World Bank/ he/ in/ and/ starting... (be)

* Cambridge University/ to/ 1902/ he/ in... (go)

* a/ he/ as/ Cambridge/ teacher/ to... (return)

* time/ he/ a/ economist/ by/ as/ this/ brilliant... (accept)

* also/ heavy/ his/ he/ by/ workload... (exhaust)

* The General Theory of Employment, Interest and Money/ it... (call)

* 1919/ in/ he/ with/ Treaty of Versailles/ he/ because/ the... (resign, disillusion)

* April/ on/ 21st/ he/ 1946... (die)

* book/ conventional/ this/ thinking/ enemies/ many/ and/ him... (go against, make)

Arrange the sentences you have made into a single paragraph.

VIII. Answer the questions

1. What are the three main questions of the economy?

2. What do you need in order to understand economics?

3. What happened to the price of oil from 1900 to 1973?

4. What did OPEC decide in 1973?

5. Why was there only a small reduction in oil sales?

6. What is an oil price shock? What did the oil price shocks lead to?

7. How do people respond to a higher price for a commodity?

8. What effect do higher oil prices have on the economy?

9. What happens throughout the economy when there are high oil prices?

10. What 2 effects did high prices have on oil-importing countries?

11. When did oil become scarce?

12. What is a scarce resource?

IX. Translate using active vocabulary

Date: 2014-12-21; view: 1937